So far this holiday week, we see slower action than last week. Simply put, the U.S. equities couldn’t keep up with the pace set last week. On the plus side, of course, the market action wasn’t bad at all; the slowing of pace over the past three days came after the strongest weekly rally of the year.
The market has adapted well to the idea that come December, the Fed would raise interest rates. With few economic data points between now and the regularly scheduled December meeting of the Federal Open Market Committee (FOMC), the rate hike seems very likely.
One of the data points this week was the second reading on GDP growth. According to the data released yesterday, in the third quarter of the year the U.S. economy expanded at a faster pace than was estimated earlier. The previous estimate indicated that growth was only 1.5 percent—while yesterday’s estimate was upgraded to a 2.1 percent annualized rate. Read more about Markets Gear Up for Rate Hike 11-25-15
Based on the latest economic data, the market now expects the Fed to begin the tightening cycle as early as this December. And we have to tell you, it seems to be taking the higher expectations of the upcoming hike in stride.
Employment continues to improve, according both to the jobs report and to the number of new jobless claims which, as we learned today, dropped further 5,000 to 271,000. Although these numbers aren’t without certain blemishes (for instance, very low participation rate), they do show improvement in the state of the labor market.
The economy is also doing better on the CPI front. In October, the latest data we have, excluding food and energy, the index was up 1.9 percent on an annual basis, matching expectations.
Read more about Fed Minutes Bring More Clarity 11-19-15
The prospect of higher U.S. interest rates has long served as a cap on market gains. In the last five trading days, the S&P 500 Index gained only on Tuesday—a small increase, at that. Stock losses, thankfully, have not been too significant, but after six straight weeks of market gains, the advance clearly has taken a breather.
One laggard sector, energy, has disproportionately hurt income investors. The impact of a stronger U.S. dollar, among other things, landed hard on energy and materials—and the U.S. currency will likely grow still stronger if the Fed begins to hike interest rates in December as now expected, even as central banks in the rest of the developed world are either easing or stand poised to do so if necessary.
Read more about No Need to Fear a December Rate Hike 11-12-15
Stocks rallied in October. In fact, it was the strongest monthly showing for U.S. equities in four years. The expectation that the Fed will hold rates flat helped stocks to recover from their third-quarter swoon.
So far, the follow-up has been weak. However, given the hawkish statement from the October Fed meeting, this showing hasn’t been too bad.
The language in this statement, as you might recall, indicated that the Fed stands ready to act as early as December. Moreover, the Fed dropped its reference to recent global and economic developments likely to put downward pressure on inflation in the near-term.
On the other hand, a phrase that “economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run” also signaled the Fed’s likeliness to move very carefully and slowly. Read more about December Hike Becomes A Distinct Possibility 11-05-15
The stock markets’ reaction to the Federal Open Market Committee (FOMC) statement yesterday afternoon was indicative of many uncertainties that we all face: while the markets ended up significantly, the initial reaction was less positive. The strongest U.S. dollar performance in two months impacted commodities and emerging markets alike. Read more about No Rate Hike, Yet 10-28-15